The rate at which prices change can affect a wide range of things, from people’s purchasing power and economic growth to raising or lowering interest costs on the national debt. That’s why it’s important to understand how inflation works and how to prepare for periods of high inflation.
Inflation is a broad rise in prices across the economy over time, eroding purchasing power for consumers and businesses. It can be caused by a number of reasons, but a leading cause is easy monetary policy — when central banks set low interest rates or increase money supply too rapidly.
Eventually, the higher price of goods and services starts to trickle down the value chain, causing companies to raise their own prices in an effort to offset the higher cost of raw materials or labor. This is known as demand-pull inflation. It can also be caused by the fact that there are simply fewer goods and services available to buy, which is known as cost-push inflation.
Consumers often feel the effects of inflation first, as their spending power erodes. Depending on the situation, this may lead them to ask for higher wages or limit their purchases, which can help slow inflation.
In the long run, higher levels of inflation almost always depresses economic growth. The reason for this is that it discourages saving and investment because the higher the inflation, the less purchasing power your savings will have in the future. It can also make it harder for companies to budget and plan for the long term, as they must increase their prices to cover higher input costs or risk falling margins.
About the Author
